We came across a bullish thesis on Huntington Ingalls Industries, Inc. (HII) on Substack by D Invests. In this article, we will summarize the bulls’ thesis on HII. Huntington Ingalls Industries, Inc. (HII)’s share was trading at $161.27 as of Feb 14th. HII’s trailing and forward P/E were 11.55 and 14.49 respectively according to Yahoo Finance.
A towering military warship off the shore, its hull representing the companies commitment to the defense sector.
Huntington Ingalls Industries (HII) is the largest U.S. military shipbuilder, specializing in designing, building, and maintaining nuclear vessels, submarines, and surface ships. Despite being a smaller name in the aerospace and defense sector compared to industry giants like Lockheed Martin and Boeing, HII holds a dominant position in military seapower with minimal competition, making it a critical player in U.S. naval operations. The company’s operations span three main segments: Newport News, Ingalls Shipbuilding, and Mission Technologies, with the largest share of revenue coming from Newport News, which designs and builds nuclear vessels. The company enjoys a monopoly in the highly specialized and capital-intensive field of nuclear vessel refueling and complex overhaul (RCOH), which provides a steady stream of predictable revenues and strong market positioning.
HII’s Ingalls Shipbuilding segment is also a leader in constructing non-nuclear ships for the U.S. Navy and Coast Guard, including assault ships and surface combatants. This segment, while facing some competition, benefits from long-term contracts and the complexity of building such sophisticated vessels. Mission Technologies, the company’s fastest-growing segment, focuses on technical solutions for cybersecurity, intelligence, and military training, and is poised for continued expansion due to an increasing demand for defense technologies. Recent acquisitions, such as Alion Science and Technology, have bolstered its capabilities, leading to substantial contract awards and revenue growth.
HII’s potential for significant upside lies in the partnership between the U.S., U.K., and Australia, known as AUKUS. This agreement is set to increase demand for nuclear submarines, with HII benefiting from increased shipbuilding capacity and future contracts for Virginia-class submarines. The company has already made strategic investments to meet this anticipated demand, including acquiring W International to boost manufacturing capabilities.
Despite some challenges, particularly from pre-COVID contracts that have depressed margins, HII is expected to see margin expansion as these contracts expire and are replaced by new agreements better aligned with current economic conditions. Management projects that operating margins will return to historical levels by 2027, offering a significant growth opportunity. In the meantime, HII’s strong cash flow generation, driven by high-margin shipbuilding and after-market services, supports a compelling dividend yield of 3.35%, the highest in a decade.
From a valuation perspective, HII appears undervalued, with a current owners’ earnings yield of 7.2%. A hypothetical future valuation based on margin expansion and steady revenue growth suggests a potential share price of $400 by the end of the decade, with an annualized return of 15% or more for investors who purchase at current prices. Given these factors, HII represents an attractive investment opportunity, particularly with a strong dividend yield, solid growth potential, and a favorable risk/reward profile.
Huntington Ingalls Industries, Inc. (HII) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 20 hedge fund portfolios held HII at the end of the third quarter which was 25 in the previous quarter. While we acknowledge the risk and potential of HII as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HII but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.